Make Dividends Deductible

February 26, 2003

Elimination of the double taxation on dividends is a major component of the president's new "boost the economy" tax package. There is a better way to achieve the goal of making debt capital and equity capital equal. Allow corporations to deduct as a business expense any dividends they may pay. Individuals would continue to pay the tax on these pay-outs, the same as bondholders pay tax on the interest income they receive from corporations. The result: no double taxation.

Now you may ask, what is the big deal? The big deal is that many large corporations pay little or no income tax. Therefore, eliminating the tax at the individual level would produce income without any taxes being paid.

Oh, you say, the president's proposal would make you differentiate between dividends from taxpaying corporations vs. nontaxpaying corporations -- a recordkeeping nightmare. Would you also have to make sure that the corporations were paying a "reasonable" tax rate so there would be a "reasonable" elimination of the double taxation?

If you feel there is a need to eliminate this source of revenue -- since it is not needed for homeland security or Medicaid or some other unnecessary federal program -- then make the process the simplest. Allow corporations to deduct the dividends as a cost of doing business, just like they do with interest expense. This would produce an equitable solution.